NFTs In Plain English…

In 2014 I bought my first Bitcoin from the convincing by a friend in the Las Vegas airport.

I didn’t do much with crypto until about 10 months ago, when NFTs (non-fungible tokens) hit my radar.

I decided to look into them more.

The more I looked, the deeper I went…

I haven’t bought any NFTs, but I taught myself to code on and with blockchains and built many applications that either sit on a blockchain or access a blockchain.

I am going to start writing about what I learned by trying to explain the techno-speak in plain English.

Here goes:

What is a blockchain?

Many times, people use the phrase “the blockchain”.

However, there is no singular blockchain, there are many blockchains, referred to as a blockchain.

Some of these chains include Bitcoin and Ethereum.

You’ve likely heard of both, if not the first!

A blockchain (or crypto network) simply is a ledger of transactions.

What is a ledger of transactions?

Think of your bank account…

You bank account has transactions: debits and credits, and the combination of those creates what is called a ledger.

A ledger can have tangible assets (a house, car, cash, land etc) or intangible assets (various intellectual properties such as, patents, copyrights, trademarks etc).

For example, you can look for real property in South Australia via here: https://sailis.lssa.com.au/products/titleSearch/registerSearchPlus?form or Australian intellectual property via here: https://search.ipaustralia.gov.au/trademarks/search/quick

All of these ledgers are centralised (controlled by a single entity), or closed.

When there is a distributed (or decentralised) ledger of transactions, cryptography allows transactions to be verified amongst parties who do no know or trust each other, creating what we know as a blockchain.

What does a blockchain contain?

A block chain contains many blocks.

The combination of those blocks/data creates a “block-chain”, or a chain (literally) of blocks linked together.

A block has several transactions (data) on it.

This means, unlike your bank account which has one transaction — debit or credit per line, a block on a blockchain has many.

A human readable block of data looks like this: https://api.blockcypher.com/v1/eth/main/blocks/78f6482c73384c19a13c0381787e1a70f89033518260a4883a9c71934f1cfa9e

The “height” field is the block number in the chain.

This “data” includes many transactions under “txids”.

These long number represent a transaction.

Each transaction can be viewed to see the details of it, just like your bank account — for example the details of first “txid” (0x55f5d6fd9f1a081059fc0e4b208c09a468b0f5aaf983a1cf35972a5b09e1c237) can be seen here: https://etherscan.io/tx/0x55f5d6fd9f1a081059fc0e4b208c09a468b0f5aaf983a1cf35972a5b09e1c237

As you can see the transaction came “from” an address.

What is an address?

An address is an account or wallet.

Similar to your bank account, it is unique and can’t be replicated.

It is what is referred to as non-fungible.

What does fungible mean?

Fungible means, it can be replaceable by another identical item — mutually interchangeable.

A $5 Australian note can be swapped with another $5 Australian note.

What does non-fungible mean?

Non fungible means, it CANNOT be replaceable by another item — it is NOT mutually interchangeable.

My house cannot be exchanged for your house even if they are valued at the same price.

They have fundamental differences.

Back to a block in a blockchain…

A block also includes transactions that went “to” an address/account/wallet also.

And there is a cost (or “fee”) for that transaction.

What is cryptocurrency?

A cryptocurrency is a currency native to a particular blockchain and defined by the blockchain protocol.

For example, Ether on Ethereum, or AUD is the currency of the Australian economy.

Each cost (or “fee”) for a transaction on a blockchain is paid

Again, back to a block in a blockchain…

These transactions could be to/from an address/account/wallet or a “contract”.

What is a contract?

A contract (or smart contract) is simply a piece of software that sits on an Ethereum-based blockchain.

Software pre-internet sat on hard drives.

Software in Internet 1.0 (pre-social media) and Internet 2.0 (social media) sat on servers or mobile devices.

As a blockchain is decentralized, it does not sit on any one server one entity controls, thus when a “contract” software is deployed (made live), it cannot be deleted or edited, like it could be with software pre-internet and with software in Internet 1.0 Internet 2.0.

It is “smart” (a smart contract) because it has logic and can do things like any other software.

It is a “contract” like in Contract Law, because it is an agreement (offer and acceptance for valuable consideration/currency).

Contracts like hiring a cleaner can be problematic, because maybe the cleaner didn’t do the job, or didn’t do it correctly.

Or the invoice didn’t get paid.

Contracts require both parties do something completely, but smart contract don’t need humans to fulfill their promises, they happen automatically.

The software does it when parameters are set.

What is coding, compiling and deploying?

A contract is written in the coding language of Solidity, it is then compiled (meaning converted from human readable format into a format only readable by computers.)

Once compiled, it is then deployed (made live) on a blockchain.

Once on the blockchain it cannot be deleted or edited, thus meaning the code and compiling needs to be rigorously tested before deployment.

What is verification?

Verification means the smart contract code written in computer readable language is converted (or decompiled) back to human readable language so that a wallet/address/account which wants to interact with the smart contract on a blockchain can see what the contract does (or does what it says it does) before interacting with it.

Kinda makes sense.

This is only available in some instances of internet 1.0 and internet 2.0, not pre-internet software — much of the code is hidden from the user.

In other words, the how the software works is hidden, only the output is visible.

What is interacting with a smart contact?

Interacting with a smart contact could mean many things, one of the main things is sending or receiving transactions (as discussed before).

What is a token?

Until this point, I have only spoken about transactions as sending or receiving them to or from an wallet/address/account and alluding to them as being debits or credits.

The item that is being transferred is a “token”.

You can see an example of this here under “Tokens Transferred:” https://etherscan.io/tx/0x9ac3a76e36f3f644cc9c0de145c0a1c9fa8c39b74b8fcb72a0ec0aa9b3304fbd

A token is digital asset defined by a smart contract and built on a specific blockchain.

Every minted token has to belong to a wallet/address/account at all times, even if it is a “null address”.

A token simply is a serial number that sits in a wallet/address/account.

You have serial numbers on all kinds of things — from your car’s licence plate number to the house address you live in.

Your property address (serial number) sits in an owner’s name (wallet/address/account) the lands titles office (on a blockchain.)

What can a serial number be used for?

If you are not very imaginative, it’s useless.

If you are creative, lots of things and one that can be very valuable (I’ll get to that later).

Tokens can be fungible or non-fungible…

Remember I talked about these before.

No doubt you have heard of NFTs, or non-fungible tokens.

What is an NFT?

An NFT is a token (digital asset defined by a smart contract and built on a specific blockchain) that cannot (non-fungible) exchanged for anything else — it is complete unique, even if it is valued the same another NFT.

An NFT is NOT an image nor is it art!

In many cases, attached to an NFT (serial number) is what is called metadata.

What is metadata?

Metadata is information that defines and describes data — it is data/information about data/information.

Or, information about the serial number.

Metadata looks similar to this, for example:

https://opensea.mypinata.cloud/ipfs/QmeSjSinHpPnmXmspMjwiXyN6zS4E9zccariGR3jxcaWtq/7925

In this example, it has 2 pieces of information stored/related to the serial number:

1. Image information; and

2. Attributes.

The Attributes has 6 pieces of information stored/related to it.

As you can see in this example, an image can be part of the NFT, but it is NOT an NFT itself!

The NFT is the serial number, and it just so happens to have an image attached to it.

An NFT is the token or token number or serial number.

Metadata can have as much or as little information as it likes!

The sky’s the limit (I’ll get to that later).

What is minting?

A token comes into existence when it is minted.

Just like when a central bank creates money, they mint it at the mint.

In crypto, a crypto coin like Ether is minted from a smart contract on the Ethereum blockchain.

Just like a $1 Australian minted coin can be swapped with another $1 Australian coin, a crypto coin is also fungible.

Simply put, crypto minting making a transaction to bring something into existence, very much like a minting a physical coin as part of a physical currency.

Practically this is done by sending a transaction from a smart contract to a wallet/address/account that is neither owned nor controlled by anyone.

This address is referred to as a “Null Address” with address of 0x0000000000000000000000000000000000000000

The Ethereum Request for Comment 20 (ERC-20) is the implemented standard for fungible tokens created using the Ethereum blockchain.

An ERC-20 token is an Ether coin.

The Ethereum Request for Comment 721 (ERC-721) is the implemented standard for non- fungible tokens created using the Ethereum blockchain.

An ERC-721 token is an Ether NFT.

There is a fee for minting any token type.

That transaction from minting creates a transaction number (or hash — see example here under “Transaction Hash”: https://etherscan.io/tx/0x9ac3a76e36f3f644cc9c0de145c0a1c9fa8c39b74b8fcb72a0ec0aa9b3304fbd).

A hash is the equivalent of a receipt.

When the minter, sends a token to another wallet via transaction (with transaction hash), a new owner is created.

The new owner may or may not pay for the token (serial number).

Both these combined, mean therefore, an NFT is not a receipt.

What is a receipt?

A receipt is a bill paid.

It needs a monetary value to it.

What is burning?

Burning is making a transaction and take something out of existence or circulation.

Again, practically this is done by sending a transaction to a wallet/address/account that is neither owned nor controlled by anyone.

Marketers have been using direct communication channels for decades — post, phone, email, SMS. etc.

To do so they needed contact details of their prospects and customers.

This is called 1st party data — collecting data directly from users (not always with permission as it can be deidentified).

Marketers have also been using advertising communication channels for hundreds of years.

This is called 3rd party data — collecting data about a user from a 3rd party.

When marketers access data someone else has collected directly from their users (again, not always with permission as it can be deindentified), this is called 2nd party data.

Especially with COVID-19, there has been an increasing distrust of government and big business.

In combination, big business, especially big-tech have been trying to wall-their-gardens restricting access from each other’s users in order to gain market share.

On 26 April 2021, Apple released iOS 14.5 for iPhone users.

Amongst many other things, the 14.5 update allowed Apple iPhone users to opt-out of allowing Facebook to track their activity outside of the Facebook platform on Apple devices.

Previously Apple allowed Facebook to put a tracking code in your internet browser (called a pixel) and follow you around the web, so that Facebook could deliver you customized ads based on your browsing behaviour in hopes it was targeted enough for you to like.

96% of iPhone users opted out (https://arstechnica.com/gadgets/2021/05/96-of-us-users-opt-out-of-app-tracking-in-ios-14-5-analytics-find/) of that tracking via the 14.5 update.

What resulted was many advertisers left the Facebook Ad product as they could no longer target effectively (read: Facebook marketing became a cost centre — costs that did not directly add to profit).

Facebook Ad prices as a aggregate went down due to low demand from advertisers and now Facebook will need to change their ad product to make it more enticing for advertisers.

In combination with the impending recession, this has likely led to their stock price falling (tears from me as a stockholder).

Then, on 20 September 2021, Apple released iOS 15 for iPhone users which included “Mail Privacy Protection” which allowed users to protect their email activity by preventing 3rd party marketing services from collecting behaviour data.

Again, marketers can no longer rely as heavily on 3rd party data.

What these trends suggest is that consumers are now choosing privacy over convenience.

Which is huge, because 10-out-of-10 times, humans pick the path of less resistance.

There are many other breadcrumbs you may have noticed too along these lines, including websites now needing to ask for permission to install cookies on your browser (GDPR in Europe) and so on.

This movement towards privacy is becoming what is called 0 party data: data that the consumer remains in full control of with the ability to modify or delete it at any time and can choose which organization they share it with and have access to it.

With different “party” data in mind, marketing as opposed to sales have traditionally been considered cost centres — functions that do not directly add to profit yet still have a cost.

I’m defining marketing as the act of value creation: defining customers; defining customer problems; solving customer problems; finding customers; and generating attention and awareness in those customers.

I’m defining sales as converting leads into customers.

And a typical marketing and sales cycle for products without NFTs could look like this:

1. A company creates attention, awareness and consideration for a product — marketing has a cost but doesn’t generate revenue;
2. Company sell the product to a (original) customer and gets initial revenue and profit, with a cost;
3. The (original) customer on-sells the product on secondary market as it still has value (although depreciated in value due to use, but still has utility so original customer makes some cost back);
4. The tertiary customer gets value, whether from the company brand or product utility; and
5. Repeat 2–4.

I’m defining a “company” as anything entity or person who has something to sell for money (whatever for that is — crypto or fiat).

Now, what if marketing could be turned into a profit centre?

A profit centre is a function (like marketing, sales, product delivery or customer service etc) that directly adds profit despite having have a cost as well?

Most brands would want that!

Sales has always been a profit centre, but for the first time in history, marketing can also be a profit centre.

NFTs can make marketing a profit centre.

Sales is a profit centre: it has both costs and adds revenue, thus profit.

But sales is not marketing — sales is converting leads into customers.

Here is how it can be done…

A typical marketing and sales cycle for products with NFTs (or the product being the NFT) could look like this:

1. A company creates attention, awareness and consideration for a product, marketing has a cost but doesn’t generate revenue;
2. Due to the attention and awareness of the NFT product itself (more on that later), the company sells product (with NFT or as the NFT) to a (original) customer and gets initial revenue and profit, with a cost;
3. Company builds its brand and the original customer promotes the brand (as they have an transferable, validated, and verified proof of asset/product);
4. The original customer on-sells product on secondary market as it still has value, either;
4a. Appreciated in value due to brand, so the original customer makes a profit and brand makes money (as royalty via the smart contract) for building brand;
4b. Depreciated in value due to use but still has utility so original customer makes some back and brand makes money for building brand or utility (as royalty via the smart contract);
5. The tertiary customer gets value, whether from brand or utility and has the ability to prove ownership and repeat 4; and
6. Repeat 3–5.

A brand (with a non-commodity product) creates a digital asset, specifically an NFT.

A digital asset could be anything from a document, to audio, to video, to logo, to spreadsheet, to website, to everything in between.

The problem with digital assets until this point in internet history, is how does one prove its their on the easiest test: of balance-of-probabilities (let alone beyond-reasonable-doubt)?

They can’t.

For example, take this random image on Flickr: https://www.flickr.com/photos/adamyzhang/51883920494/

How does Adam Y Zhang prove they own it?

I’m certainly not asserting it’s not theirs, but they can’t.

What if someone else actually took that photo and Adam Y Zhang uploaded it claiming it was theirs?

Totally plausible.

Again, I’m certainly not asserting it’s not Adam Y Zhang’s, I’m simply illustrating a point.

A blockchain removes this uncertainty.

I’m not talking here about plagiarism, only ownership.

It’s a subtle but big difference.

Back on track…

Remember “a brand (with a non-commodity product) creates a digital asset, specially an NFT.”

The brand makes that digital asset in the form of an NFT, valuable (more on this later).

The brand sells that digital asset in the form of an NFT.

A blockchain allows 0 party data (remember this?) — where each user has digital, validated, and verified proof they own something forever, like their data forever.

And due to smart contract capability of many blockchains, users have the ability to sell their data for a profit (unlike before) and get resale royalties on any subsequent sale.

The brand now has 1st party, although anonymous (because NFT wallets/accounts/addresses are numbers only) data on every owner including the current owner for as long as the blockchain it is minted on exists on that asset, and thus, owners of the assets, as everything on the blockchain is transparent, searchable and uneditable.

Just like marketing never being a profit center, the ability to track 1st party data for the life of the product has also never existed in marketing previously.

In fact, if a brand can get as many NFTs into consumer wallets, the brand can incentivise as many currents owner of the assets to get back into contact with the brand by exchanging their traditional 1st party marketing data — post, phone, email, SMS. etc for additional incentives to make the 1st party data even richer and non-anonymous for the brand.

I have already built a version of this: https://cahsoutmynft.com.

What this means is with NFTs, a company is incentivised with royalties on the secondary market baked into the smart contract to build brand not just sell products.

Again, this has never existed in marketing previously.

eBay, Facebook Marketplace, Gumtree etc and FedEx, DHL etc are the ones who have capitalised on this money.

And the original customer is incentivised to promote the company and digital asset to build more attention, awareness and consideration so the company can build brand on top of that awareness and so the digital asset they own appreciates in value.

Everyone’s long-term interests are aligned — again, this has never existed in marketing previously.

Better still the company could give all their initial asset holders a spilt of royalties for every future sale on the secondary market for the life of the blockchain the asset exists on.

Again, this has never existed in marketing previously.

That is taking affiliates and referral to a potential level we have not seen before!

What are some broad uses of NFTs?

You could think about adding a token as an incentive to:

1. New users; or

2. Existing users.

And this could be a:

1. Paid token; or

2. Free token (via an airdrop transfer).

And the token could be:

1. The thing; or

2. A bonus to augment something.

Some of those combinations could be:

1. New users pay for a token as the product purchase they receive;

2. New users get a free token as the product they receive;

3. New users get a free token as a bonus to a product purchase they receive;

4. Existing users pay for a token as the product purchase they receive;

5. Existing users get a free token as the product they receive; and

6. Existing users get a free token as a bonus to a purchase they receive.

Let’ s go through some combinations:

1) New users pay for a token as the product purchase they receive

This is the majority of the NFT market currently, and certainly what the mainstream media is hyping: the profile picture (PFP) of a cartoon animal — the image is the asset.

Example: https://boredapeyachtclub.com/

The brand has the opportunity to get 1st party data, by asking holders to swap their 1st party data for another incentive so the brand can launch a product to them later on.

This type of token funds the brand launching, and due to the blockchain, it can be resold at a future date if the brand or token’s metadata becomes more valuable, where the brand as the issuer gets a royalty and the holder may make a capital gain.

2) New users get a free token as the product they receive

This could be used an incentive to get new users interested in a new brand.

Example: https://goblintown.wtf/

The brand has the opportunity to get 1st party data, by asking holder to swap their 1st party data for another incentive so the brand can launch a product to them later on.

This type of token due to the blockchain can be resold at a future date if the brand or token’s metadata becomes more valuable, where the brand as the issuer gets a royalty and the holder may make a capital gain.

3) New users get a free token as a bonus to a product purchase they receive

This is being used an incentive to get new users interested in making a purchase from an existing brand.

Example: https://gizmodo.com/bulgari-octo-finissimo-is-the-worlds-mechanical-thinnes-1848687282 (although this NFT also has verification of authenticity utility).

The brand has the opportunity to get 1st party data, by asking holder to swap their 1st party data for another incentive so the brand can launch a product to them later on.

The product purchase funds the brand launching (minus the cost of the additional product) and due to the blockchain can be resold at a future date if the brand or token’s metadata becomes more valuable, where the brand as the issuer gets a royalty and the holder may make a capital gain.

4) Existing users pay for a token as the product purchase they receive

This could be used an incentive to get existing users to make additional purchases.

Example: https://opensea.io/collection/veefriends-series-2

https://www.boredbreakfastclub.com/

That token, due to the blockchain can be resold at a future date if the brand or token’s metadata retains value or becomes more valuable, where the brand as the issuer gets a royalty and the holder may make a capital gain.

5) Existing users get a free token as the product they receive

Many current NFT projects in category #1 do this as a reward for being an existing owner.

Example: https://thedapplist.com/learn/what-is-the-mutant-ape-yacht-club/

That token, due to the blockchain can be resold at a future date if the brand or token’s metadata retains value or becomes more valuable, where the brand as the issuer gets a royalty and the holder may make a capital gain.

6) Existing users get a free token as a bonus to a product purchase they receive

Like category #5, this is could be used an incentive to get existing users to make additional product purchases.

That token, due to the blockchain can be resold at a future date if the brand or token’s metadata retains value or becomes more valuable, where the brand as the issuer gets a royalty and the holder may make a capital gain.

In all these cases, the user/token holder becomes a defacto salesperson: they hold a digital asset that has the ability to appreciate in value and can be sold with very little friction (unlike physical assets), thus they are incentivised to help promote and increase the value of the brand and in doing so potentially their asset holding.

Unlike shareholding and promoting shares (or any other financial instrument which requires licensing), any asset created by a brand can be promoted and sold — eBay, Facebook Marketplace, Gumtree, FedEx, DHL etc are all built on it.

In all these combinations of token as incentives, marketing can be a profit centre.

How?

These tokens can create value, solve customer problems, generate attention and awareness in customers.

What could that value be?

Like any product or service, digital or physical, tokens (although digital product) can represent almost anything — “money, art, photos, music, text, code, game products, control, access, and whatever people dream up in the future.”

The sky’s the limit.

To be continued…